Home Country Determinants of Outward FDI From Developing Countries

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Khanindra Ch. Das Margin: The Journal of Applied Economic Research 2013 7: 93 DOI: 10.1177/0973801012466104 The online version of this article can be found at: http://mar.sagepub.com/content/7/1/93
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MarginThe Journal of Applied Economic Research 7 : 1 (2013): 93116 SAGE Publications Los Angeles/London/New Delhi/Singapore/Washington DC DOI: 10.1177/0973801012466104
Home Country Determinants of Outward FDI from Developing Countries

Khanindra Ch. Das
This article examines various home country determinants of outward FDI from developing economies, which have received limited attention in empirical studies. The role of home country determinants is investigated for a large sample of developing economies, as against a handful of developing economies, for the most recent period, 19962010, using a panel data econometric framework. The results indicate that source countrys level of economic development, globalisation, political risk and science and technology investments contribute significantly to outward FDI from developing countries. While outward FDI might be unavoidable in the course of economic development and globalisation, developing countries need to emphasise improving political governance in order to prevent capital outflow arising out of high domestic political risk. On the flip side, science and technology investments could contribute to higher outward FDI, thereby yielding complementary benefits of internationalisation in the long-run. Thus, given the evolving role of developing countries in the global economic scenario, a balance between domestic and international investments is crucial for them to harness the benefits of globalisation, which can be achieved through suitable governance and policy reforms in specific fields. Keywords: Outward FDI, Developing Countries, Macroeconomic Factors, Research and Development JEL Classification: F21, O24, O38
1. IntroductIon
Globalisation has been characterised by significant growth in the volume of trade and foreign direct investment (FDI) across countries. Under the rubric
Acknowledgements: I would like to thank Rajeswari Sengupta, Nilanjan Banik and an anonymous referee for the useful comments and suggestions on earlier versions of this article. The usual disclaimer applies. Khanindra Ch. Das is Doctoral Scholar, Institute for Financial Management and Research (IFMR) 24 Kothari Road, Nungambakkam, Chennai 600034, India, email: khanindra.
das@ifmr.ac.in
94 MarginThe Journal of Applied Economic Research 7 : 1 (2013):93116
of outward-looking and export-oriented policy, many developing countries have emerged as a source of FDI in recent times. While inward FDI is a key source of capital in capital-scarce developing countries, the rapid growth in many such economies in the last decade has been accompanied by a surge in outward FDI. The increase in outward FDI from developing countries is noteworthy. There has been a big leap in outward FDI from developing countries since the early2000s. Outward FDI flows from developing countries have increased from $55.23 billion in 1995 to $134.19 billion in 2000 and to $327.56 billion in 2010 (see Figure 1). Further, outward FDI stock as a percentage of gross domestic product (GDP) has also risen from 5.8 per cent in 1995 to 12.7 per cent in 2000 and 15.7 per cent in 2010. The relative position of developing countries as a source of FDI has improved substantially. In 1990, the share of developing countries in world FDI outflows was a meagre 4.93 per cent. It increased to 15.22 per cent in 1995 and reached 24.75 per cent in 2010. The share of developed countries on the other hand, has declined from 95.07 per cent in 1990 to 88.85 per cent in 2000 and finally to 70.67 per cent in 2010. Developing countries (including south-east Europe and the Commonwealth of Independent States (CIS)) accounted for 29.33 per cent of total outward FDI flows in 2010 (see Figure 2). Although the increase in the share of developing countries in the recent years of the global financial crisis can be attributed partly to a fall in outflows from developed countries, such an increase has been steady throughout even during the pre-crisis period.
Figure 1 Developing Country FDI Flows, 19952010
700 600 500 $ billion 400 300 200 100 0
19 95 19 96 19 97 19 98 19 99 20 00 20 01 20 02 20 03 20 04 20 05 20 06 20 07 20 08 20 09 20 10
Outward Inward
Source: Authors compilation from UNCTAD, World Investment Report, 2011.
Das DETERMINANTSOFOUTWARDFDI 95
Figure 2 Share in World FDI Outflows, 19902010

100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 1990 1995 2000 2005 2006 2007 2008 2009 2010
Developed Economies
Developing Economies
South-East Europe and CIS
The rise of developing countries in the arena of global FDI calls for a detailed understanding of the determinants thereof. Not only has there been an increase in the number of transnational corporations (TNCs) from many developing countries but they have also grown in size. Many TNCs from developing countries appear in the worlds top 100 non-financial TNCs, ranked by foreign asset-holdings. Developing country TNCs, both state-owned and private, have also been successful in striking multi-billion dollar deals globally in recent times. For instance, of the total of 152 merger and acquisition (M&A) deals worth over $1 billion and above in 2010 by both developed and developing country firms, more than 30 deals were by developing country TNCs. (The details of such M&A deals by developing countries are reported in the Appendix Table A1.) It is clear that TNCs from India, Hong Kong, China, Russia, Brazil, Korea, Malaysia, Qatar, Singapore, Colombia, Thailand and Mexico have successfully completed a number of multi-billion dollar deals outside their home economies, thereby spurring overall outward FDI from developing countries. Investments are in various sectors including energy and natural resources, telecommunication, motor vehicles, services, etc. Furthermore, a considerable amount of such investments are targeted towards developed countries such as US, UK, Canada, etc. The increase in outward FDI from developing countries raises a host of issues with regard to the determinants, particularly the home country determinants that propel the outward FDI. The literature on the determinants of FDI
MarginThe Journal of Applied Economic Research 7 : 1 (2013):93116
flows, both inward and outward, that involves emerging countries has dealt with various macroeconomic, institutional and firm-specific characteristics pertaining to the home and host countries (Buckley et al., 2007; di Giovanni, 2005; Dunning, 1981a; Frenkel et al., 2004; Globerman and Shapiro, 2002; Hattari and Rajan, 2010; Kyrkilis and Pantelidis, 2003; Nayyar, 2008; Song et al., 2011; Wang et al., 2012). The increase in outward FDI from developing countries has grabbed attention in recent academic discussions. However, the empirical literature on outward FDI from developing countries has remained fairly thin and limited to the examination of the outward FDI experience of a handful of developing countries. Existing studies on the subject have specifically tried to model the outward FDI experience of individual countries or a few countries together (Athukorala, 2009; Buckley et al., 2007; Goh and Wong, 2011; Hattari and Rajan, 2010; Kalotay and Sulstarova, 2010; Kolstad and Wiig, 2012; Kumar, 2007, 2008; Mlachila and Takebe, 2011; Wang et al., 2012; Wee, 2007). Most of the studies focus on host country determinants (Buckley et al., 2007; Kolstad and Wiig, 2012) with limited attention being given to source country determinants. Further, the studies that examine the source country determinants of outward FDI from developing countries are confined to individual country-specific experiences (Goh and Wong, 2011; Wang et al., 2012). Thus the effects of home country characteristics on outward FDI for a large sample of developing countries are not clear from the existing empirical literature. The article contributes to the literature by examining several home country determinants of aggregate outward FDI for a large sample of developing countries for the period 19962010. The article is based on country-level panel data, given the paucity of studies that investigate outward investment of developing countries in a panel-data econometric framework. In particular, it explores the effects of the level of economic development, globalisation, political governance, science and technology investment and currency strength. The examination of home country factors also provide important policy insights since governments and policymakers can influence only domestic factors driving outward FDI, not the host country ones. The article finds that source country levels of economic development, openness, political governance and science and technology investment play a crucial role in spurring outward FDI from developing countries. In particular, higher GDP per capita, trade openness, political risk and investment in science and technology result in higher outward FDI. The result is robust to alternative methods of normalising outward FDI.
The results, supporting an institution escapism view, emphasise the need to improve political governance in developing countries so as to prevent outflows of capital due to higher domestic political risk. On the other hand, investments in science and technology could contribute to internationalisation through the outward FDI route, which is likely to yield complementary benefits in the long-run. Given the evolving role of developing countries in international investments, the results highlight the role of governance and policy reform in specific areas, which can strike a balance between domestic and international investments. The rest of the article is organised as follows. The theoretical motivation and hypotheses to be tested are given in Section 2. Section 3 describes the methodology and data sources used in the article. The econometric results are discussed in Section 4. Conclusions are given in Section 5.
2. theoretIcalFrameworkandhypothesIsdevelopment
The dominant theoretical foundation in the area of outward FDI has been the investment development path (IDP) propounded by Dunning (1981a, 1981b), which relates the dynamics of foreign investment with a countrys stages of economic development.1 According to IDP, countries go through five stages of investment development. The first four stages of an IDP include pre-industrialisation in which no inbound and outbound investment takes place followed by attracting inward investment in resource-based and labourintensive sectors. This investment continues to grow and expand to various sectors of the economy, changing foreign firms attractiveness for the domestic market due to an increase in the costs of labour and resources that makes it possible for domestic firms to develop ownership advantage and start investing abroad, engaging in outbound direct investment that tends to surpass inbound investment by foreign firms, respectively. The final stage of the IDP occurs when there is a fluctuating balance between outward and inward direct investment. The basic hypothesis of the IDP is that as a country develops, the configurations of advantages facing foreign-owned firms that might invest in that country and that of its own firms that might invest overseas, undergo changes (Dunning, 2001). There is a burgeoning literature that tests the IDP hypothesis (see BoudierBensebaa, 2008; Verma and Brennan, 2011 and the references therein) and
1
The other theories in connection with outward FDI of developing countries include the Uppsala school, latecomer theory, country specific theory etc.; see Hansen (2010) for a discussion.
several criticisms have been raised against the basic hypothesis. The basic IDP hypothesis makes outward FDI dependent solely on a countrys level of economic development, measured by GDP per capita and hence restrictive in nature as it takes for granted that underlying economic forces work in a certain fashion. Straightforward regressions of outward FDI on GDP per capita constitute a potentially naive view of the development process (Liu et al., 2005). According to the critics, while a common sense interpretation of GDP per capita and outward FDI relations has some appeal, it cannot successfully explain the internationalisation of all countries. Further, every country is not likely to pass through the stages of investment development as hypothesised (Erdilek, 2003; Hansen, 2010; Verma and Brennan, 2011). Bellak (2001) emphasised that the IDP model is not a normative approach, stating that the realised path of a particular country should reflect the stylised path. He also states that in many cases, countries IDPs do not follow the stylised path and are idiosyncratic to a large extent. Several modifications to IDP have been proposed in order to explain emerging countries outward FDI. These refinements are intended to account for emerging phenomena such as trade, institutions, technology and other macroeconomic variables (Bellak, 2001; Dunning et al., 2001; Durn and Ubeda, 2001; Liu et al., 2005; Wang et al., 2012; Witt and Lewin, 2007). Dunning et al. (2001) presents a refinement of the IDP hypothesis to incorporate trade into IDP, involving types of products and industry. One of the refinements is that both inward and outward direct investment flows in average or above-average FDI-intensive sectors will be positively correlated with their counterparts in trade. However, the basic premise of the refinement remains the same, i.e. GDP per capita determines the level of outward FDI. Furthermore, institutional factors have been emphasised in recent literature (Boisot and Meyer, 2008; Erdilek, 2003; Le and Zak, 2006; Luo et al., 2010; Wang et al., 2012; Witt and Lewin, 2007; Wright et al., 2005). According to an institution-based view, a firms internationalisation is facilitated or constrained by a multitude of institutional forces including elements that promote and hinder upgrading of existing resources and capabilities (Wang et al., 2012). The institution escapism view suggests that poor institutional factors in the home country, such as regional protectionism, quota allocations, high tax rates, corruption, regulatory uncertainty, insufficient protection of intellectual property rights and governmental interference, may push firms to invest abroad in pursuit of more efficient institutions (Luo et al., 2010). Recognising the importance of institutions, Dunning and Lundan (2008) examine how an institutional dimension can be incorporated into the IDP paradigm. Durn and Ubeda (2001) suggest the inclusion of a greater number of structural
and idiosyncratic variables in the analysis. These include indicators such as technology, research and development expenditure, etc., intended to measure the degree of evolution of a country in the process of structural change. In addition, many other source country macroeconomic factors such as exchange rate and interest rate have been considered prominent in explaining outward FDI (Kimino et al., 2007). These refinements are expected to throw light on the underlying mechanism of the IDP of developing countries. Empirical research on this front is scarce but promising. For instance, Liu et al. (2005) examined whether Chinas outward FDI follows the standard pattern and sequence of IDP hypothesis (Dunning, 1981b) or a refined version. The results are quite consistent with the refined IDP hypothesis, which incorporates factors such as investments in human capital, exports and inward FDI besides the conventional variable, the GDP per capita. Therefore, extension of the basic IDP merits attention by incorporating additional explanatory variables as suggested by various authors in the literature. This article is embedded within the ongoing debate in the theoretical literature on the determinants of outward FDI. Outward FDI from developing countries requires investigation in a generalised IDP framework that incorporates multiple factors, which in turn can provide important policy implications. Further, from the policy perspective, the identification of factors contributing to outward FDI would be more useful than identifying the stages of IDP of each country. Therefore, there is a need to extend the basic IDP theory to account for other relevant factors. Combining the basic IDP with additional variables, outward FDI is taken to be a function of the following variables: Outward FDI = f (GDPPC, TOPEN, POLRISK, RDGDP, REER) Where GDPPC denotes GDP per capita, TOPEN refers to trade openness, POLRISK stands as a proxy for institutional and political factors, RDGDP represents technological factors and REER is another macroeconomic factor, namely the real effective exchange rate. The remainder of this section analyses the hypotheses that are being tested in this article.
2.1 Level of Economic Development

The first hypothesis to be tested is drawn from the IDP literature, i.e. the level of economic development contributes positively towards outward FDI, even though the net outward investment position might change at various stages. Macroeconomic factors such as the level of economic development contribute
to the ease and rapid expansion of internationalisation. The evolution of FDI in connection with developing countries (first inward and later, outward) can be viewed as a dynamic paradigm (Ozawa, 1992). The direction of FDI, both inward and outward, changes with the structural transformation of the economy. The initial condition attracts inward FDI in standard, labour-intensive manufacturing activities. With rapid expansion of the modern sector, factor endowment in the country begins to shift from low-skilled labour to relatively more physical and human capital abundance, paving the way for investment-driven industrialisation. The shift in factor abundance prompts firms to transplant their existing operations to other countries where they can produce cheaper. Outward FDI could take place to exploit various firm-specific and country-specific advantages. Hypothesis 1: Outward FDI is positively associated with the level of economic development.
2.2 Trade Openness

The openness of a country is expected to positively influence outward FDI. Evidence suggests that an expansion of trade activities enables domestic firms to acquire knowledge about foreign markets and skills related to organising foreign operations and marketing their products internationally and hence, have the ability to establish operations abroad (see Buckley et al., 2007; Goh and Wong, 2011; Kyrkilis and Pantelidis, 2003). A higher degree of trade openness provides more exposure to foreign markets. It gives scope for the exporting firm to serve such a market by locating in the foreign markets due to cost advantage. Similarly, firms may choose to locate in the source countries of import to combat import competition. Further, importing firms can break up their production process, giving them the scope for outward FDI for the processing and intermediate stages of production. Banga (2007) suggests that trade can have two potential effects on outward FDI from developing countries, i.e. higher exports may assure existing markets and therefore lower the risks attached to such investments and higher imports into the country may have a displacement effect on investment, which may look outward into economies with lower manufacturing cost and higher access to larger markets. Hypothesis 2: Outward FDI is positively associated with degree of trade openness.
2.3 Political Risk

Institutional and political factors have received increasing attention in research in development economics since Barro (1991) explained economic growth in a cross-section of countries using measures of political stability, among others.
According to Adam and Dercon (2009), research on economic development has thus become increasingly engaged with questions of political economy and in particular, with how political choices, institutional structures and forms of governance influence economic choices made by governments and citizens and how, in turn, these structures reflect deeper forces, such as the patterns of colonial settlement and conflict, physical geography and natural resource endowments, disease ecology of societies and ethnic diversity, as well as a host of other cultural factors. In connection with outward FDI, the political risk of the home country contends to be an important determinant. Tallman (1988) finds that the investment activity of industrialised countries in the US is dependent on home country economic and political conditions. While examining the case of Mexico, Thomas and Grosse (2001) found that as political risk increases in the home country, firms are more likely to escape or diversify away from that political risk by investing abroad, including in Mexico. In the extreme scenario, political risk is also found to accelerate capital flight (Le and Zak, 2006). Hypothesis 3: Higher political risk in the home country increases outward FDI.
2.4 Indigenous Innovation Efforts

Outward FDI can be affected by the technological achievements of a country. Although it may not always be possible for developing countries to come up with newly minted technology but the policies aimed at technological capacity building can produce spillover benefits. It has been argued that technology diffusion and adoption depends on technological efforts (Lall, 2001) and absorptive capacity (Fu et al., 2011; Grima, 2005; Li, 2011; World Bank, 2008). The inappropriateness of Northern technology in developing countries calls for a greater effort to develop indigenous innovation for catching up. Fu et al. (2011) highlights that to benefit from international technology diffusion spurred by globalisation, developing countries need to exert parallel indigenous innovation efforts, i.e. walking on two legs, in assimilating and augmenting their technological learning and capacity building. Further, only in the presence of local innovation capacity will multinational enterprises (MNEs) adopt a more integrated innovation practice, which has greater linkage with the local economy and thereby enable greater opportunities for knowledge transfer (Franco et al., 2011). Without proactive indigenous innovation efforts, foreign technology remains static and does not turn into real technological capacity. This suggests that developing countries that exert greater effort in technological innovation are likely to benefit from international technological diffusion,
augmenting the country-specific advantages, which could help a greater level of internationalisation through outward investment. The evidence of technological capacity on outward FDI has been mixed. For instance, Tolentino (2008) finds that the national technological capacity of India Granger causes the level of outward FDI from India, but this is not true in the case of China. Nevertheless, it would be interesting to see if there is a positive effect at the cross-country level. Hypothesis 4: Outward FDI is positively associated with home countrys technological efforts.
2.5 Currency Strength

Increase in currency strength tends to favour outward investment, as a strong currency can buy more in real terms. The appreciation of home country currency lowers the capital requirements of foreign investments in domestic currency units, making it easier to raise capital than in the case of a depreciating currency. Besides, home currency appreciation reduces the nominal competitiveness of exports, increasing that way the motive for choosing FDI as a mode of serving foreign markets (Kyrkilis and Pantelidis, 2003). Direct investment outflow is also found to have a cointegrating relationship with the real exchange rate of industrialised countries (Choi and Jeon, 2007). However, according to Kyrkilis and Pantelidis (2003), if currency depreciation compensates for deteriorating productivity and labour costs, export-oriented FDI may be used as a long-term effective measure for securing market shares abroad. This type of FDI is directed towards countries with a more favourable cost structure, mainly other developing countries. Hypothesis 5: An appreciation of real effective exchange rate increases outward FDI. In the following section the econometric model, along with variable definition and data sources, is provided for testing the above hypotheses.
3. methodologyanddata
We use annual data for a sample of 56 developing economies (listed in Appendix) to understand the home country determinants of outward FDI. The analysis covers the time period from 1996 to 2010, chosen primarily on the basis of data availability. The sample accounts for more than 78 per cent of FDI outflows from developing countries during this period. The outward FDI is investigated using the following baseline regression model: OFDIGDPit = + 1 GDPPCit + 2 TOPENit + 3 POLRISKit + 4 RDGDPit + 5 REERit + uit
Where i denotes economy, and t denotes time. The dependent variable (OFDIGDP) is FDI outflows normalised by GDP of economy i at time t, which also facilitates comparison of economies of varying sizes. It is constructed using data from the World Investment Report (2011) and World Development Indicators (WDI). The empirical specification assumes a linear form. In the panel estimation, the explanatory variables are introduced sequentially in order to judge their explanatory power. The explanatory variables, pertaining to the home country include: macroeconomic factors such as the level of development captured by the GDP per capita (GDPPC) globalisation captured by trade openness measured by exports and imports of goods and services as a percentage of GDP (TOPEN) political governance represented by a political risk index (POLRISK) science and technology investments, a proxy for indigenous innovation efforts, captured by research and development (R&D) expenditure as percentage of GDP (RDGDP), and currency strength denoted by real effective exchange rate (REER) index. The political risk index is based on several institutional parameters namely: government stability, socioeconomic conditions, investment profile, internal conflict, external conflict, corruption, military in politics, religious tensions, law and order, ethnic tensions, democratic accountability and bureaucratic quality.2 The REER index of home currency with respect to a basket of foreign currency is used as a measure of currency strength.3 Data on GDPPC, TOPEN and RDGDP are obtained from World Development Indicators. POLRISK is sourced from International Country Risk Guide, and REER from International Financial Statistics.4 In the empirical estimation, as hypothesised above, the expected signs of the coefficients of GDPPC, TOPEN, RDGDP and REER are positive. The sign of POLRISK will be negative in the empirical estimation in order to support the
The political risk index lies between 0100, 0 implying higher political risk. An increase in the index reflects an appreciation of the currency in real terms; appreciation of home currency is postulated to have a positive effect on outward FDI. 4 It is to be noted that data availability on POLRISK and RDGDP restricts the sample period, i.e. 1996 to 2007 in the case of Model 3 and Model 4 in the empirical estimation, whereas the sample period for first two models are 1996 to 2010. Further, data on REER is available for fewer than half the countries in the sample. Although REER data is available for the entire period, in order to avoid a loss of country information, the model including REER (Model 5) is also estimated for the period 19962007.
2 3
hypothesis stated above. This is because of the way POLRISK is measured, i.e. a lower value of the index represents higher political risk at home. All the variables are normalised, which is required for comparison across countries given their heterogeneity. In order to deal with endogeneity, the independent variables are lagged by a year in the estimation. Further, it is unrealistic to assume that the drivers of outward FDI are the same across all developing countriesthe panel estimation helps to overcome this limitation as it allows for country and time effects. We also augment the specification by including region dummies in all the models. (Classification of the countries by regions is explained in the Appendix.) The region dummies are: for Africa (DAF), for Latin America and Caribbean (DLAC), for West Asia (DWA), for South, East and South-East Asia (DSESEA), and the dummy for the transition economies of southeast Europe and CIS is the excluded category. The regional dummies can be significant because of the presence of regional trade and investment agreements and other factors that can influence FDI outflows at the regional level.5
4. estImatIonresultsanddIscussIon
Descriptive statistics and the correlation matrix of the variables used for estimation are presented in the appendix (Tables A2 and A3). The results of the random effects panel regressions based on the baseline model are presented in Table 1, where the explanatory variables are introduced sequentially. The Breusch and Pagan Lagrangian multiplier (LM) test (Breusch and Pagan, 1980) and Hausman test (Hausman, 1978) indicate the appropriateness of the random effects generalised least-square results compared to pool OLS and fixed effects respectively.6 The baseline estimation in Table 1 shows that GDP per capita, trade openness, political risk and research and development expenditure are statistically significant at conventional levels with expected signs. In particular, outward FDI rises with GDPPC, TOPEN, POLRISK and RDGDP. Therefore, the source countrys level of economic development, globalisation, political risk and
The regional contribution to total FDI outflows from developing countries reveals that Asian countries have been the dominant players (81.03 per cent in 1995 and 74.67 per cent in 2010) followed by Latin America and the Caribbean (13.61 per cent in 1990 and 23.28 per cent in 2010). The share of Africa is rather meager. In particular, the special role of south, east and south-east Asian countries is worth mentioning. In 1995, 82.13 per cent and in 2010, 70.70 per cent of FDI outflows from developing countries were from the south, east and south-east Asian countries. 6 The appropriateness of random effects is ambiguous in the case of model 5. Nevertheless, random effects are used across all models, as the number of cross-section units is larger than the number of years in the sample.
5
investments in research and development result in higher outward FDI.7 The estimated parameters are higher for RDGDP followed by POLRISK, TOPEN and GDPPC. These estimates are statistically significant and economically meaningful. However, the real effective exchange rate does not yield a statistically significant coefficient.8 The explanatory power has improved consistently from model 1 to model 5 in Table 1, justifying the inclusion of each of the additional variables in a sequential manner. Overall, the five explanatory variables included in the estimation explain 67.58 per cent of the variation in the outward FDI of the sample countries. The results also show that the region dummies are significant in a few cases, i.e. with positive coefficients for Latin America and Caribbean, and south, east and south-east Asia. These findings suggest that outward FDI is encouraged by the economic development and globalisation of developing countries. For example, the variable capturing the level of development of the home country (GDPPC) is positive and highly significant. Therefore, the level of development seems to matter for internationalisation in our estimation.9 Further, a 1 percentage point increase in TOPEN results in a 0.0125 percentage point increase in outward FDI from developing countries relative to their GDP (Model 5, Table 1). The positive effect of trade openness is found to support previous studies (Buckley et al., 2007; Goh and Wong, 2011; Kyrkilis and Pantelidis, 2003). This suggests that in the long-run, outward-oriented policies are crucial for the promotion of trade openness which in turn could facilitate outward investment. The results of political risk is in accordance with the institution escapism view, and supports the findings of Thomas and Grosse (2001) and Le and Zak (2006) in which, as political risk increases in the home country, firms are more likely to escape from that political risk by investing abroad. The significance of political risk implies that developing countries need to place greater emphasis on reducing political instability by improving governance standards so as to prevent capital outflows arising out of higher domestic political risk. Interestingly,
7 We also performed a number of iterations by including additional variables such as value-added in the service sector, foreign exchange reserves, domestic credit to private sector, capital account openness, the interest rate and secondary enrollment, but none of these were found to have statistically significant explanatory power. 8 Note that RDGDP, which was insignificant in model 4, turns significant with the inclusion of REER. We calculate the correlation between the two variables to check if there can be any serious multicollinearity. It is found that correlation between the two variables is low (-0.101) though negative (Table A3). Therefore, multicollinearity is less likely to be the case. Also, this is not a case in where a significant variable turns insignificant with the inclusion of an additional variable, as in the case of serious multicollinearity. 9 This is in line with the predictions of basic IDP theory in which there is a positive effect of GDPPC on outward FDI in the early stages of IDP.
Table 1 Dependent Variable: outward FDI per cent of GDP Model 2 Model 3 Model 4 Model 5
Random Effects Model, 19962010
Model 1
GDP per capita
0.00016 (0.00005)
Trade openness
0.00014 (0.00005) 0.0307 (0.0090)
Political risk (Index)
0.00024 (0.00009) 0.0339 (0.0091) 0.0614 (0.0354)
R&D expenditure
0.00026 (0.00010) 0.0356 (0.0087) 0.0970 (0.0428) 0.1669 (0.6604)
REER (Index)
Constant
DAF
DLAC
DWA
DSESEA
Time dummy Number of observations Number of countries R2 overall F LM test Hausman test
0.2298 (0.5886) 0.3816 (0.5796) 0.3058 (0.7589) 1.5166 (1.4550) 0.9376 (0.9591) Yes 777 56 0.2149 37.79 1518.93 0.89
2.6783 (0.8972) 0.2796 (0.5374) 1.0997 (0.7000) 1.0488 (1.2485) 0.1034 (0.6963) Yes 732 55 0.3913 48.48 841.92 3.62
1.0112 (2.5593) 0.5720 (0.8064) 1.1017 (0.9055) 1.8727 (1.2978) 0.4547 (0.8014) Yes 487 47 0.4213 54.88 280.06 6.45
3.1061 (3.0517) 0.7210 (0.7363) 1.4194 (0.9574) 2.3311 (1.6048) 0.3726 (0.7275) Yes 338 47 0.4461 69.22 193.81 0.07
0.0002 (0.00007) 0.0125 (0.0039) 0.0393 (0.0180) 1.1745 (0.4228) 0.0080 (0.0077) 0.9996 (1.4434) 0.5187 (0.3197) 0.9096 (0.3974) 1.3731 (0.8907) 0.6946 (0.2472) Yes 173 24 0.6758 134.23 0.00 2.54
Source: Authors calculations. Notes: Figures in the parenthesis represent robust standard errors; p<0.10; p<0.05; p<0.01.
the RDGDP has a positive effect on aggregate outward FDI supporting the hypothesis of a positive effect of indigenous innovation efforts. The result is in accordance with Tolentino (2008), in which the national technological capacity of India Granger causes the level of outward FDI from India. The positive effect is expected, as higher R&D effort enables developing countries to develop technological capacity which in turn can be explored by domestic firms investing abroad.
4.1 Robustness Check

Additional robustness checks are also performed by normalising outward FDI with gross fixed capital formation (OFDIGFCF).10 This helps to assess FDI outflows in relation to domestic capital formation, which gives important implications about whether outward FDI substitutes domestic investments and the contributory factors. The robustness check results are reported in this sub-section in order to validate the above findings. The results of the random effects are reported in Table 2. The results are largely in consonance with the baseline regressions presented in Table 1. The only difference is the significance of REER with an opposite sign (Model 5, Table 2), but only at the 10 per cent level. This kind of effect could arise if the relative disadvantage of currency depreciation is compensated by factor cost advantages associated with outward investments. Kyrkilis and Pantelidis (2003) have also found mixed results of the effects of the REER on outward FDI. Furthermore, there could be strategic investments, which are undertaken despite adverse currency movements or due to deterioration of domestic investment climate. Overall, the robustness check validates the baseline findings.
5. conclusIons
The article examines various home country determinants of outward FDI for a large sample of developing countries between 1996 and 2010. Over the last decade, developing countries have been actively investing abroad, in order to become part of the global supply chain and remain competitive. Outward investment might be unavoidable as an economy progresses and experiences structural transformation. Further, the expansion of trade would promote outward FDI as it enables domestic firms to acquire knowledge about foreign markets and learn the skills of organising foreign operations and marketing their products internationally. The empirical finding of this article suggests that the home countrys level of economic development, globalisation, political
10 Data on FDI outflows as percentage of gross fixed capital formation is obtained from UNCTAD, World Investment Report (2011).
Table 2 Model 2 Model 3 Model 4 Model 5
Random Effects Model, 19962010
Dependent Variable: Outward FDI Per cent of Gross Fixed Capital Formation
Model 1
GDP per capita
0.0009 (0.0003)
Trade openness
0.0007 (0.0002) 0.1384 (0.0404)
Political risk (Index)
0.0012 (0.0004) 0.1549 (0.0473) 0.2544 (0.1606)
R&D expenditure
0.0013 (0.0004) 0.1600 (0.0448) 0.4347 (0.2012) 0.2891 (2.9119)
REER (Index)
Constant
DAF
DLAC
DWA
DSESEA
Time dummy Number of observations Number of countries R2 overall F LM test Hausman test
1.1578 (2.4348) 1.7406 (2.0697) 2.4895 (3.6087) 7.6939 (8.1904) 2.3754 (4.0978) Yes 730 56 0.2017 40.79 1309.80 0.05
13.1510 (4.1186) 1.3341 (1.7652) 6.0445 (2.9845) 4.8441 (5.9439) 1.5907 (2.2349) Yes 709 55 0.3461 51.01 881.36 1.59
0.8955 (12.0646) 3.5674 (3.0751) 6.9317 (4.1568) 8.1256 (7.2138) 2.4927 (2.9636) Yes 472 47 0.3605 50.09 359.18 4.60
11.0136 (14.3433) 4.4435 (2.7773) 8.9112 (4.2832) 9.4846 (7.8663) 1.8861 (2.6160) Yes 325 47 0.3871 61.28 259.09 5.22
0.0007 (0.0003) 0.0518 (0.0167) 0.1772 (0.0834) 5.6869 (1.8336) 0.0648 (0.0355) 8.4095 (6.3453) 2.4202 (1.4989) 4.9044 (1.7935) 4.8291 (3.7505) 2.4562 (1.1882) Yes 173 24 0.6499 101.56 1.01 2.37
Source: Authors calculations. Notes: Figures in parenthesis represent robust standard errors; p<0.10, p<0.05, p<0.01.
risk and technological efforts are important determinants of such outward FDI from developing countries. However, the negative sign of political risk on outward FDI highlights the need for improving political governance to prevent investment outflows arising out of higher domestic political risk. At the same time, developing countries must also work towards enhancing their technological capacity through research and development. Given the higher growth and structural transformation of many developing countries, we can expect further expansion of outward FDI as these countries aspire to become significant regional or global players. The findings of this analysis emphasise the factors that developing countries need to focus on, in order to keep increasing the share of outward FDI in their portfolio of investments. Thus, this analysis has pertinent policy implications as well. In particular, developing countries need to ensure that outward FDI is not at the expense of domestic investment. This can be achieved through suitable governance and policy changes in specific fields. The results of the estimation should be treated with caution as it is based on aggregate FDI outflows and not on bilateral outward FDI flows (since suitable data on bilateral FDI outflows is available only for a few developing countries and years). Further research could be devoted to examining the relevance of these factors at the bilateral and firm levels (that extends beyond the case of an individual country) and also examine the role played by various domestic regulatory and institutional bottlenecks that might drive outward FDI from developing countries.
appendIx
List of Developing Economies in the Sample Africa: Algeria, Botswana, Egypt, Mauritius, Morocco, Seychelles, South Africa, Tunisia; Latin America and Caribbean: Argentina, Bolivia, Brazil, Chile, Colombia, Costa Rica, El Salvador, Guatemala, Jamaica, Mexico, Nicaragua, Panama, Paraguay, Peru, Trinidad and Tobago, Uruguay; West Asia: Jordan, Kuwait, Saudi Arabia, Turkey; South, East and South-east Asia: Brunei, China, Hong Kong, India, Indonesia, Korea, Macao, Malaysia, Mongolia, Pakistan, Philippines, Singapore, Sri Lanka, Thailand; South-east Europe and CIS: Armenia, Azerbaijan, Belarus, Bosnia and Herzegovina, Croatia, Georgia, Kazakhstan, Kyrgyzstan, Montenegro, Moldova, Russian Federation, Serbia, TFYR Macedonia, Ukraine. These economies are considered to be the developing (or transition) economies in the UNCTAD classification. The sample contains economies for which data were available during 19962010 but not necessarily for all the years.
Table A1 Industry of the Ultimate Acquired Company Radiotelephone communications Electric services Petroleum refining Radiotelephone communications Crude petroleum and natural gas Motor vehicle parts and accessories Soybean oil mills Offices of holding companies, nec Coal mining services Crude petroleum and natural gas Offices of holding companies, nec General medical and surgical hospitals National government Mens and boys clothing and accessory stores Trucking, except local Crude petroleum and natural gas Power, distribution and specialty transformers 40 62 100 50 100 100 51 70 70 100 100 66 100 100 40 100 9.1 7.1 5.5 4.8 4.1 3.8 3.1 2.7 2.6 2.5 2.4 2.2 2.2 2.2 2.2 1.9 100 10.7 Shares Value Acquired ($ billion) Rank 2 4 10 13 16 21 25 40 45 46 49 53 58 59 61 62 70
Cross-Border M&A Deals (by Developing Countries) Worth Over US$1 billion Completed in 2010
Ultimate Home Economy Kuwait France Spain Norway
Industry of the Ultimate Acquiring Ultimate Host Company Economy
India
Telephone communications, except radiotelephone Hong Kong, China Investors, nec China Crude petroleum and natural gas Russian Radiotelephone communications Federation India Investors, nec China Motor vehicles and passenger car bodies Brazil Iron ores China Crude petroleum and natural gas India Business services, nec Korea, Republic of National government
Venezuela Hong Kong, China United States Argentina Australia United Kingdom Brazil Iron ores Switzerland Malaysia National government Singapore Korea, Republic of Ship building and repairing United Arab Emirates Qatar National government United Kingdom Singapore Land subdividers and developers, Hong Kong, except cemeteries China Colombia Investors, nec Canada Colombia Banks United States
Singapore Canada Malaysia Brazil Australia Brazil United States Sweden China Netherlands Portugal United States United States United States United States Canada United States Investors, nec Investors, nec Crude petroleum and natural gas Crude petroleum and natural gas Uranium-radium-vanadium ores Soybean oil mills Marine cargo handling Life insurance Cement, hydraulic 34 16 100 57 100 22 100 35 38 33 37
20
Australia 60 100 75 80 1.6 1.6 1.6 1.5 1.5 1.5 1.3 1.3 1.2 1.1 1.1 1.1
1.0
100 1.7 1.7 1.7 79 82 83 87 88 91 99 102 104 111 125 129 134 140 144
146
1.8
75
China India China
Offices of holding companies, nec Crude petroleum and natural gas Radiotelephone communications Electric services
Thailand
Brazil
China China
Concrete products, except block and brick Crude petroleum and natural gas Investors, nec Power, distribution and specialty transformers Bituminous coal and lignite surface mining Steel works, blast furnaces and rolling mills Electric services Motor vehicles and passenger car bodies
China Singapore Brazil
Brazil
Mexico India China Russian Federation Brazil
Bituminous coal and lignite surface mining Steel works, blast furnaces and rolling mills National government Motor vehicles and passenger car bodies City agency Banks Offices of holding companies, nec Sausages and other prepared meat products Television broadcasting stations Crude petroleum and natural gas Crude petroleum and natural gas Commercial physical and biological research Iron ores
Table A2 Descriptive Statistics of the Variables OFDIGFCF GDPPC TOPEN POLRISK RDGDP REER
OFDIGDP
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
Mean SD Mean SD Mean SD Mean SD Mean SD Mean SD Mean SD Mean SD Mean SD Mean SD Mean SD
1.20 (3.56) 1.01 (3.37) 0.71 (2.96) 0.82 (2.14) 0.87 (4.94) 0.93 (3.29) 0.92 (2.71) 0.94 (4.05) 1.50 (4.54) 1.31 (2.94) 1.69 (4.05)
5.67 (16.52) 4.12 (15.17) 3.04 (13.54) 3.73 (8.49) 3.73 (20.24) 4.19 (13.94) 5.35 (18.41) 4.24 (22.71) 7.43 (21.54) 6.38 (14.65) 8.38 (20.05)
4359.79 (5875.80) 4448.30 (6032.88) 4087.18 (5312.57) 4049.83 (5191.48) 4280.55 (5702.92) 4145.31 (5371.14) 4163.67 (5415.03) 4617.70 (5801.88) 5336.23 (6674.49) 6182.12 (7839.70) 7075.72 (9027.49)
79.97 (52.73) 82.05 (49.61) 85.61 (52.52) 85.81 (57.20) 91.51 (61.44) 89.63 (58.77) 91.94 (59.89) 95.21 (65.68) 101.14 (70.77) 102.37 (71.52) 104.24 (74.54)
67.08 (7.93) 69.05 (8.25) 67.67 (9.71) 65.06 (10.31) 64.57 (10.24) 67.03 (9.82) 65.94 (8.96) 66.41 (8.39) 67.77 (7.74) 67.99 (8.21) 67.92 (7.99)
0.54 (0.50) 0.50 (0.47) 0.48 (0.47) 0.51 (0.48) 0.51 (0.48) 0.51 (0.51) 0.50 (0.50) 0.52 (0.52) 0.53 (0.54) 0.53 (0.57) 0.59 (0.62)
114.70 (16.81) 117.65 (16.21) 114.59 (15.49) 106.10 (16.50) 106.00 (13.82) 105.48 (13.38) 102.40 (12.47) 96.99 (9.41) 97.63 (6.16) 100.00 (0.00) 103.16 (4.52)
2007
2008
2009
2010
Mean SD Mean SD Mean SD Mean SD
2.05 (5.01) 1.41 (3.52) 1.59 (4.55) 1.65 (4.92)
9.02 (24.08) 6.53 (17.61) 7.50 (22.26) 7.21 (21.46)
8114.20 (9966.05) 9236.82 (11217.96) 8099.51 (9461.38) 8189.47 (9364.42)
104.60 (72.11) 108.29 (77.13) 93.83 (68.30) 99.89 (78.49)
. . . . . . . .
0.63 (0.70) 0.60 (0.38) . . . .
105.96 (9.08) 111.76 (15.30) 112.13 (13.01) 115.66 (14.48)
Source: Authors calculations. Note: SD stands for standard deviation, reported in parenthesis.
Table A3 GDPPC TOPEN
Correlation Matrix of the Variables POLRISK RDGDP REER
OFDIGDP
OFDIGFCF
OFDIGDP OFDIGFCF 1 0.413 0.551 0.249 0.122 0.061 1 0.526 0.547 0.330 0.019 1 0.451 0.289 0.023
1 0.973
GDPPC
0.435
TOPEN POLRISK RDGDP REER
0.592 0.259 0.157 0.034
1 0.318 0.060
1 0.101
Source: Authors calculations.
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